Tuesday, 29 November 2016

In August 1991,
hardline elements in the army and KGB staged a coup against Mikhail
Gorbachev, shortly after Gorbachev had agreed to reorganise the USSR
as a new confederation. To many this seemed like an end to the
reforms that Gorbachev had brought, as the coup leaders appeared to
have the support of the whole military. Yeltsin was defiant in
Moscow, but those who remembered the Prague Spring probably thought
the tanks would win out. Then the coup’s nominal leader, Gennady
Yanayev, gave a press conference in which he looked
nervous with his hands shaking, and it became clear that the coup
leaders were meeting serious resistance. It collapsed shortly
afterward.

I remembered this
when watching the proponents of hard Brexit shout down any concern
about what the government might agree following the EU referendum,
and attack anyone who pointed out the difficulties that leaving the
single market might bring. They too have carried out a sort of coup
against parliamentary democracy, and maybe declaring judges enemies
of the people is the equivalent of Yanayev’s shaking hand. They
cannot quite believe what they have done, and fear it may all
collapse when people realise what is going on. Our Prime Minister has
had to draw
on her faith in God to enable her to continue leading this coup.

If you think coup is
too strong a word, think about what has happened. An advisory
referendum decided by a very narrow majority to leave the EU. That is
all this slim majority of the electorate decided. They did not vote
to leave the single market (SM), partly because most leaders of the
Leave campaign told us (correctly) that leaving the EU was quite compatible with
staying in the SM. They did not vote to end freedom of movement.
Leaving the EU is not one policy, but a whole range of possible
policies with quite different effects, and the electorate have said
nothing about their preferences among these possibilities. In short,
the referendum was about the EU and not the SM, and whatever they say
now we know that you can be in the SM without being part of the EU.

Yet a new
government, with no mandate from the voters, has decided that only it
should be allowed to interpret what leaving the EU should amount to,
and the electorate through their representatives in parliament should
have no say in the matter. The people, having indicated a change in
direction, are to be allowed no say whatsoever in where exactly they
are to be led. The differences between these alternative paths out of
the EU are immense, and this choice on how exactly to leave the EU
will have a huge impact on every citizen. Yet the people and their
representatives are not even to be allowed to know what options the
government are aiming for. (The OBR was even denied knowledge of how
the government intending fulfilling its guarantees to Nissan.) The
pretext for this coup, involving keeping their negotiating hand
secret, is as thin as the Soviet coup’s claims that Gorbachev was
unwell.

Any attempt at
parliamentary control over what might happen is described as trying
to stop Brexit. Why not seek to stay in the SM? Just asking that
question means to the coup leaders that you are trying to stop Brexit
(of course it does not). Why not see what might be on offer before
starting the clock on being thrown out with nothing? That is just a
delaying tactic, they say. Why not have a second referendum on the
final deal? Finding out what the electorate thinks once that the exit
deal is clear would be against the will of the people, they chime
without irony. When you are told that consulting the people or their representatives is
against the will of the people, you know there has been a kind of
coup.

But I fear that in
this case the coup leaders’ nervousness is unwarranted. Three
judges have thrown MPs a lifeline, a chance to stop this coup, and MPs look like throwing it right back. Those Conservative MPs who
know what damage this will do have decided they can do nothing to
stop the Conservative party being taken
over by fanatics. The Labour party appears pathetic: its leadership
wanting exit from the SM for their own reasons (talking shamelessly
about ‘access’ in the hope of muddying the water) and the PLP is
more concerned about losing votes than improving their electorate’s
welfare (it is the story of austerity all over again). They had a
chance of coming together to lead the opposition to this coup and
they have blown it. Instead of Boris Yeltsin, we have Tom Watson, who
joins
in the mantra that opposing triggering Article 50 is going against
the will of the people.

And instead of
courageous citizens of Moscow we have Labour party members saying it
is best to bide time and work within for change. This timidity is
obnoxious to see: they should instead be demanding their MPs take
back control. It is their prosperity that will be diminished by this
coup, their right to work in the EU taken away. It seems to me that
approving Article 50 is the last chance for representative democracy
to have its say. Once that vote is in the bag, the government can do
what it likes and nothing can be certain to stop them. (A vote on any
final deal is no choice, because the consequences of saying no will
be far worse.)

So MPs are acting
like turkeys voting for Christmas. They know that in all likelihood
voting to trigger Article 50 will throw away their chance to stop the
government ending our membership of the SM, thereby
reducing their constituents access to public services and the chance
to keep young people’s right to work in the EU. They will be
handing all the levers of power to a government that seems to be run
by a minority of fanatics. Is this what a once proud country has allowed itself to become? Is this what a parliament that once stood up to kings has been reduced to?

Monday, 28 November 2016

David Willetts, who
I have generally found to be pretty sensible, praises
Hammond’s Autumn Statement in the FT as casting off Osborne and
Treasury orthodoxy. This is the same Autumn Statement that I
described
as a return of austerity: wasting resources by cutting spending when
interest rates are at their lower bound. I think these two different
views of the same event can be explained by an analogy.

Imagine four
different reactions after a fire breaks out.

The house is
fitted with a sprinkler system which puts the fire out pretty
quickly

There is no
sprinkler system, but the house owners find every drop of water they
can, using buckets and hoses, to put it out

The owners
get one bucket, but only ever fill it half up because water is not
free

The owners do
nothing: the fire will soon burn it itself out, they say, and water
needs to be conserved.

In case it is not
obvious, the fire is a negative output gap - wasting resources - and
water is the deficit or debt. David Willetts is praising Hammond for
moving from (4) to (3). Instead what he and the Treasury should be
doing is (2), and then installing (1), which if you haven’t guessed
is analogous to a fiscal rule with a zero lower bound knockout.

I know the
Conservatives will not do (1) until this generation of politicians
have passed, because it would be an implicit admission that 2010
austerity was a mistake. I also know that Labour is committed to such
a fiscal rule.

Hammond may get
lucky, and economic growth could be much stronger than forecast such
that the MPC soon stops QE and raises rates. In my analogy, the fire
might not spread. But policy should always take account of reasonable
risks, and the probability at the moment is that we will stay at the
lower bound for some time. The official output gap may be small
compared to 2010 (although I worry it might in reality be a lot
larger), but if you discovered a fire in your house what would you
do?

Saturday, 26 November 2016

A number of people,
including the occasional economic journalist, are puzzled about why
government debt at 90% of GDP seemed to cause our new Chancellor and the markets so
little concern when his predecessor saw it as a portent of impending
doom. I always argued that this aspect of austerity had a sell by
date, so let me try to explain what is going on.

The 90% figure comes
from a piece of empirical work which has been thoroughly examined,
and found to be highly problematic. (Others have used rather more
emphatic language.) Part of the problem is a lack of basic thinking.
Why should the markets worry about buying government debt, beyond the
normal assessment of relative returns. The answer is that they worry
about not getting their money back because the government defaults.

If a government
cannot create the currency that it borrows in, then the risk of default
is very real. Typically a large amount of debt will periodically be
rolled over (new debt sold to replace debt that is due to be paid
back). If that debt cannot be rolled over, then the government will probably be
forced to default. Knowing that, potential lenders will worry that
other potential lenders will not lend, allowing self fulfilling beliefs to
cause default even if the public finances are pretty sound.

The situation is
completely different for governments that can create the currency
that the debt they sell is denominated in. They will never be forced
to default, because they can always pay back debt due with created
money. That in turn means that lenders do not need to worry about
forced defaults, or what other lenders may think, so this kind of
self fulfilling default will not happen.

Of course a
government can still choose to default. It may do so if the political
costs of raising taxes or cutting spending is greater than the cost
of defaulting. But for advanced economies there is an easier option
if the burden of the public finances gets too much, which is to start
monetising debt. That is what Japan may end up doing, and what others
may also do if QE turns out to be permanent. But this is a very
different type of concern than the threat of default. And it does
not, in the current environment, lead to the emergence of large
default premiums and market panics.

How can I be so
sure? Because with QE we have had actual money creation, and it has
not worried the markets at all. It seems hard to tell a story where
markets panic today about the possibility of monetisation in the
future, but are quite sanguine about actual monetisation today.

So for economies
that issue debt in currency they can create, there is no obvious upper limit anywhere near to current debt/GDP ratios when economies are depressed and inflation is
low. Japan shows us that, and we must stop treating Japan as some
special case that has no lessons for the rest of us. (How often did we hear of their lost decade in the 1990s that it couldn’t happen
anywhere else.)

It was good that the
IFS suggested Hammond has a look at Labour’s fiscal rule. As I
explained in this post, Hammond’s new ‘rule’ is pretty
worthless. But one key part of Labour’s rule that keeps being
ignored but is crucial in today's environment is the knockout if interest rates hit their
zero lower bound. It is for the reasons described above that this
knockout is there and is perfectly safe: when interest rate policy fails you can completely and safely forget the
deficit and debt and use fiscal policy to ensure the recovery. It is
the basic macro lesson of the last 6 years that is fairly well
understood among academic economists but still remains to be learnt
by most people who talk about these things. Whether senior economists
in the UK Treasury need to learn it or just keep quiet about it for
other reasons I do not know.

Friday, 25 November 2016

One of the problems
with instant responses is that you miss the big picture. And although
everything I wrote
immediately after the Autumn Statement was perfectly correct, I too
failed to spell out the big picture. The big picture is that
austerity has returned. (Credit to Rick for a much better call.)

Let me explain.
Unlike some, I do not just define austerity as fiscal consolidation
or government spending cuts. Instead I define it as fiscal
consolidation that creates an output gap. That should normally only
happen for three reasons:

you are part
of a monetary union (or fixed rate regime) and the rest of the union
is not doing fiscal consolidation (as much).

if interest
rates are stuck at their lower bound.

If the
monetary authority is incompetent.

I believe it makes
sense to define austerity that way, because only then does fiscal
consolidation lead to a waste of aggregate resources.

A competent central
bankers’ tell (as in poker) for being at the zero lower bound is
that they embark on new Quantitative Easing (QE). Central bankers
know that interest rates are a much more reliable instrument than QE,
so expanding QE tells us we are at the lower bound as they see it. We
also know that fiscal expansion is a more reliable instrument than
QE. So if central banks are doing QE, it pretty well follows that we
have austerity.

Now Hammond could
have changed that on Wednesday by announcing a significant fiscal
stimulus relative to previous plans. He did not. The increase in
public investment, as I said in my previous post
and the IFS confirms,
was small, as were his other measures. This, as Martin Sandbu points
out (who, naturally, also called it right), was a huge missed
opportunity. Don’t get misled by actually borrowing levels to judge
changes in fiscal stance: most of the additional borrowing was
unintentional.

As I have tried to
explain on many occasions, the nature of policy pre-Brexit was
different from policy in 2010 and 2011. The later was austerity as I
like to define it. The former was bad in many ways, one of which was
to run the risk of more austerity if we had a negative demand
shock. Brexit was a negative demand shock, and so we now have
austerity, and Hammond did far too little to rectify his predecessors
mistake.

So why did Hammond
keep his squeeze on the public sector’s current spending largely
unchanged (again, see my previous post
for the relevant chart)? Why not give some money to the NHS? Perhaps
he too wants to pursue deficit deceit: to shrink the state. Another
possible reason is that the Treasury has persuaded him that he should
not ‘take any risks’ with public debt. Let me end by saying a bit
about that.

Another definition
of austerity beside the two already mentioned is an economic policy
that focuses above all else on the need to reduce government debt
levels. That is the sense of austerity being used in this BBC piece.
Needless to say I very much side with Jonathan Portes rather than
Michael McMahon on this. But many journalists are puzzled
nevertheless: what about all that stuff about the world falling in if
debt to GDP reached 90% of GDP? At what level do those who buy UK
government debt start to worry about default? I will talk about that
tomorrow.

Thursday, 24 November 2016

Got back from a trip
to London to give my lecture (pics above: thanks to everyone at SPERI
and New Statesman, plus Beth Rigby for chairing and everyone else for
coming) looking forward to not thinking about economics for the rest
of the day, only to find the Chancellor had given an Autumn
Statement. Luckily the whole thing appears to be a damp squib
compared to the expectations raised beforehand, so here are just a
few points. On helping the so-called just about managing, see
the ever excellent Ben Chu.

Public investment

Remember all the
talk beforehand about substantial increases in public investment?
What we got is increases of 0.3% or 0.4% of GDP in each of the
financial years from 2017 to 2020. These increases give us figures
that are slightly above the numbers we saw from the Labour government
in the years immediately before the financial crisis. We should be
spending much, much more when interest rates are so low.

Fiscal rules

There was also much
speculation that we might return to more sensible fiscal rules, now
that Osborne’s had been busted. Instead the new Charter for Budget
Responsibility is honestly not worth the paper it is written on. We
have a target for the total cyclically adjusted deficit (including
investment) for a fixed year. Whatever the number involved, this
makes two mistakes: having a fixed rather than rolling date, and by
including public investment in that target. It is a recipe for panic
cuts in public investment a year or two before the target date.

There is also a
target of a falling debt to GDP ratio by the same date. I’m at a
loss to understand why you need a target for this as well as a target
for the deficit. The change in the debt to GDP ratio is after all
just the change in debt (which is the deficit) and the change in GDP.
So targeting the change in the debt to GDP ratio just adds to the
deficit target some things that you cannot control: GDP growth and
your position in the business cycle. I knew there would be no zero
lower bound knock out, because that would be a clear admission that
2010 austerity was a mistake. But I did hope for something more
intelligent than this.

I fear George
Osborne has totally discredited the idea of a fiscal rule. Remember
that Labour stuck to its fiscal rules for 10 years, before they
inevitably fell victim to the largest recession since the 1930s. Yes
there was fiddling at the margin, but the important point was that
they did have a strong influence on what the Chancellor did. I now
suspect that, by breaking a whole series of rules within a shorter
period of years, whatever a Conservative Chancellor says has become
pretty worthless.

It shows how
Conservative Chancellors keep postponing rises in fuel duty. One
obvious question is why. But the OBR is also concerned about whether
this makes a mockery of its forecasts. Each year they are obliged by
parliament to continue to assume that in all subsequent years the
government will raise fuel duty after each ‘one-off’ cut. And
almost each time the Chancellor announces a ‘give away’ for
motorists: they will postpone any increase ‘just for this year’.
You can see why they do it: it allows the papers to write favourable
headlines. But if they really are going to go on doing this, it means
that really their policy is to have no increases in fuel duty. Fiscal
forecasts based on the assumption that they will increase fuel duty
will be much too optimistic. The government is fooling parliament and the public, but the OBR cannot do anything about it because of the restrictive rules it is forced to operate under.

The cost of
Brexit

The big news was of
course the higher levels of borrowing. As this table shows, a
significant part of that is due to the fiscal costs of Brexit.

Surprise surprise -
there will actually be less money available for the NHS and other
public services after leaving, rather than more. It is as if that red
Leave bus just crashed and rolled over so it is now upside down. The
two big factors are lower productivity growth and lower immigration.
The OBR has, unsurprisingly, followed their own previous analysis
(immigration) and the consensus economist view (productivity growth).

I can almost
guarantee that the Sun and Mail will make no mention of this - or if
they do it will only be to rubbish the OBR. So, following the theme
of my lecture, I really hope that the broadcasters’ nightly news
programmes pick this up. Channel 4 news did do so, but I didn’t
watch the others (let me know in comments).

The NHS and
squeezing the public sector

Not a penny more for
an NHS in crisis. Make no mistake, as this blog has shown before, the
current crisis in the NHS is simply because it has been starved of
resources for the last six years. I really wish Labour (it has to be
them, because they are the only party who the media will take any
notice of) would run a campaign that busted the myth of a ‘protected’
NHS. But what Hammond’s refusal to do anything about this shows is
that this government is continuing the squeeze of the public sector
begun by the Coalition. Here is the relevant chart from the OBR.

Tuesday, 22 November 2016

Don’t just ask
why people are disenchanted with elites, but also why they are
choosing the alternatives offered by snake-oil salesmen.

This could be the
subtitle of the talk
I will be giving later today. I will have more to say in later posts,
plus a link to the full text (the writing of which distracted me from
writing posts over the last week or two), but I thought I would make
this important point here about why I keep going on about the media.
In thinking about Brexit and Trump, talking about the media is not in
competition with talking about disenchantment over globalisation and
de-industrialisation, but a complement to it. I don’t blame the
media for this disenchantment, which is real enough, but for the fact
that it is leading people to make choices which are clearly bad for
society as a whole, and in many cases will actually make them worse
off. They are choices which in an important sense are known to be
wrong.

Many will say on
reading that last sentence that this is just your opinion, but in a
way that illustrates the basic problem. Take Brexit. We know that
erecting trade barriers is harmful: the only question is whether in this case it
will be pretty harmful or very harmful. Some of this is
already in the process of happening, as the depreciation reduces real
wages. We also know that erecting barriers against your neighbours is
extremely unlikely to be offset in any significant way by doing deals
with countries further away. This is knowledge derived largely from
empirical evidence and uncontroversial theory and agreed almost
unanimously by economists.

The moment you
reduce it to just another opinion, to be balanced by opposing
opinions, as happened in the broadcast media during the Brexit
campaign, you allow that knowledge to be ignored when critical
choices are made.

A snake-oil
salesman is not a perfect analogy, because those championing populist
causes often have something to work on that makes some sense to the
not very knowledgeable voter. [1] It could be the idea that immigration
reduces access to public services, for example. But our media should
help people avoid adopting solutions that are known to be wrong,
rather than assisting the process by devaluing knowledge. For example, they could continually point out that most economists think EU immigration puts in more resources for public services than it takes out.

There is another way
the media can mislead, by establishing politicised truths, which I
will discuss later on. Let me end with a link to a SPERI blog post I
wrote to coincide with the talk. It is about the role of
neoliberalism in the rise of populism. Although it draws from some of
the points in the talk, it is quite separate. I basically argue in
that post that a story that recent events like Brexit or Trump are a
consequence of neoliberal ideas is potentially a mislabeling, because
pushing globalisation is essential a liberal rather than a neoliberal
idea. Instead I offer two concrete ways in which neoliberalism, and
its emphasis on shrinking aspects of the state and deregulation, did
indeed help bring about Brexit and Trump through austerity in the UK
and deregulation of the broadcast media in the US.[1] Postscript 24/11/16 Actually the analogy is better than I thought: see this great post from Chris.

Saturday, 19 November 2016

Immediately after
the Brexit vote, all the analysis I saw argued that Article 50 would
not be triggered for some time. They all made a simple mistake: they
were thinking rationally about what would be best for the UK. Rick
has an excellent analogy that elaborates on one that I and others
have used, and it really would be best if you read his blog rather
than for me just to repeat it. The conclusion, which this earlier
analysis I mentioned had also come to, is that triggering Article 50
without any kind of idea about what any agreement would look like
puts the UK in a very weak negotiating position.

This is why the EU
were pressing for Article 50 to be triggered as soon as possible.
Their real fear is that the prospect but not the actuality of the UK
leaving would hang over them for years, and that was the UK’s
strongest card. Before playing this card the UK could at least get a
clear idea of what the EU might be prepared to offer, and possibly
get some commitments that sketch the broad outlines of any deal. Once
Article 50 is triggered, the UK will be far more desperate for a deal
than the EU. It would only be a slight exaggeration to say it allows
the EU to dictate terms. Triggering Article 50 was our best card, yet
it is a card that Theresa May is determined to throw away.

Just to emphasise
the point, this has absolutely nothing to do with whether you voted
to Remain or Leave. Anyone who actually wants a good deal from the EU
when we leave should realise that the UK’s negotiating position
becomes instantly weaker once Article 50 is triggered. I do not know
whether those who have successfully pushed for triggering Article 50
so soon simply live in a deluded state where they think that the UK
will be in the stronger negotiating position, or whether they are
desperately afraid that if it is not done soon people will go off the
whole idea of leaving. But whichever it is, it is an act of folly,
whether you want to leave or not. It substantially increases the
likelihood of getting a bad deal.

As for Labour’s
position, I’m afraid all I can say is you were warned. Jolyon
Maugham describes
Labour’s position as checkmating itself, but I strongly suspect
this is a match the Labour leadership do not want to win. The fact
that others in the PLP are content to go along with this does not
make it any better. As I wrote at the time, all this was one very
good reason for voting for Smith rather than Corbyn.

And if Labour wants
to position
itself as being the party that can make a success of Brexit, that
road spells doom. If MPs think they can avoid losing votes to UKIP or
the Conservatives in their traditional heartlands by adopting this
line (or trying to be all things to everyone and therefore in reality
champion of nothing), they will lose many more votes in their new
heartlands than they will save in the old. Many voters feel much more attached
to Europe than they do to Labour. This is something I have argued for
some time, and this
poll suggests I am right. If Labour backs Brexit they will get less
votes than the Liberal Democrats. As I also wrote during the Labour
leadership election, Brexit changes everything.

But I do not want to
get distracted by that. The key point is that triggering Article 50
so soon does not make sense even if you voted Leave.

So if MPs, pro or
anti leaving, had any sense at all, and any independence at all, they
would vote against. Yes the right wing press will scream and brand
you an ‘enemy of the people’, but if have the interests of the
British people as your priority rather than your short term
popularity that is what you will do. You could even
get voters on your side if you explain why you are doing it. This is
one of those moments, like the Iraq war vote, where it is utterly
obvious what should be done. We are not yet a country that is run by
the Mail and the Sun, but triggering Article 50 will make it look
suspiciously like we are.

Friday, 18 November 2016

Preparing for my
SPERI/NEW Statesman lecture
(now sold out I’m afraid), I had a closer look at something that
had been in the back of my mind for some time. In the mid 1970s,
Peter Jay and John Birt put forward a new philosophy for broadcast
journalism. Their first article in the Times started

“There is a bias in television journalism. Not against any
particular party or point of view – it is a bias against
understanding.”

A lot of the points that I have made in this blog are in their
writing: the need to get more economic expertise into reporting, how
he said/she said reporting and panel discussion can reduce rather than increase understanding and knowledge.

What became of their initiative? Both had opportunities to put their
ideas into practice, and Birt became Director General (DG) of the BBC
in 1987 (in rather unfortunate circumstances, with Alasdair Milne
being forced to resign because of conflicts with the Thatcher
government, echos of which are perhaps still with us today). But
Birt’s period as DG seems to have been associated with more
centralisation of news and current affairs, and more ‘risk
management’, which included pulling programmes that were
controversial, and might have increased understanding!

It is tempting to draw the conclusion that the mission to explain
fell foul of political interference, but that may be too easy on
television journalism itself. It may simply be that the mission to
explain worked against dominant journalistic values and culture. The
need to generate scoops and headlines, for example, which comes from
talking to or interviewing politicians rather than explaining
economics. The entertainment value that comes from conflict and
debate. The idea that it is more exciting television to have a
correspondent embedded with troops in a war rather than calmly
explaining the roots of the conflict from somewhere less ‘dramatic’.

But whatever the reasons for the demise of the ‘mission to
explain’, it is not exactly the same as what I have discussed in
the past. Failing to explain does not account for what I call the
politicisation of truth: where something becomes true just because
one lot of politicians keep saying it and the ‘other lot’ do not
contest it. That comes from insularity, from an excessive focus on
the Westminster bubble.

I will talk more about this in my lecture, and subsequently in this
blog.

Wednesday, 16 November 2016

Jo Michell has a
long post
in which he enters in a debate between Ann Pettifor and myself about
the role of mainstream macroeconomics in austerity. Ann wanted to pin
a large part of the blame for austerity on mainstream macroeconomics,
and Jo largely sides with her. Now I have great respect for Jo’s
attempts to bridge the divide between mainstream and heterodox
economics, but here he is both wrong about austerity and also paints
a rather distorted picture of the history of macroeconomic thought.

Let’s start with
austerity. I think he would agree that the consensus model of the
business cycle among mainstream Keynesians for the last decade or two
is the New Keynesian (NK) model. That model is absolutely clear about
austerity. At the zero lower bound (ZLB) you do not cut government
spending. It will reduce output. No ifs or buts.

So to argue that
mainstream macro was pushing for austerity you would have to argue
that mainstream economists thought the NK model was deficient in some
important and rather fundamental respect. This was just not
happening. One of, if not the, leading macroeconomist of the last
decade or two is Michael Woodford. His book is something of a bible
for those using the New Keynesian model. In June 2010 he wrote
“Simple Analytics of the Government Expenditure Multiplier”,
showing that increases in government spending could be particularly
effective at the ZLB. The interest in that paper for those working in
this area was not in that this form of fiscal policy would have some
effect - that was obvious to those like myself working on monetary
and fiscal policy using the NK model - but that it could generate
very large multipliers.

This consensus that
austerity would be damaging and fiscal stimulus useful was a major
reason why we had fiscal stimulus in the UK and US in 2009, and why
even the IMF backed fiscal stimulus in 2009. There were some from
Chicago in particular who argued against that stimulus, but as
bloggers like DeLong, Krugman and myself
pointed out, they simply showed up their ignorance of the NK model.
Krugman in particular was very familiar with ZLB macro, having done
some important work on Japan’s lost decade.

What changed this
policy consensus in 2010 was not agitation from the majority of
mainstream academic macroeconomists, but two other events: the
Eurozone crisis and the election of right wing governments in the UK
and US Congress.

Jo tries to argue
that because discussion of the ZLB was not in the macroeconomic
textbooks, it was not part of the consensus. But textbooks are
notorious for being about 30 years out of date, and most still base
their teaching around IS/LM rather than the NK model. Now it might
just be possible that right wing policy makers were misled by the
consensus assignment taught in these textbooks, and that it was just
a coincidence that these policy makers chose spending cuts rather
than tax increases (and later tax cuts!), but that seems rather
unlikely. You do not have to be working in the field to realise that
the pre-financial crisis consensus for using changes in interest
rates as the stabilisation tool of choice kind of depended on being
able to change interest rates!

Moving on from
austerity, Jo’s post also tries to argue that mainstream
macroeconomics has always been heavily influenced by neoliberal
ideology. To do that he gives a short account of the post-war history
of macroeconomic thought that has Friedman, well known member of the Mont Pelerin
society, as its guiding light, at least before New Classical
economics came along. There is so much that could be said here, but
let me limit myself to two points.

First, the idea that
Keynesian economics was about short term periods of excess or
deficient demand rather than permanent stagnation pre-dated Friedman,
and goes back to the earliest attempts to formalise Keynesian
economics. It was called the neoclassical consensus. It was why the
Keynesian Bob Solow could give an account of growth theory that
assumed full employment.

Second, the debates
around monetarism in the 1970s were not about the validity of that
Keynesian model, but about its parameters and policy activism.
Friedman’s own contributions to macroeconomic theory, such as the
permanent income hypothesis and the expectations augmented Phillips
curve, did not obviously steer theory in a neoliberal direction. His
main policy proposal, targeting the money supply, lost out to policy
activism using changes to interest rates. And Friedman certainly did not approve of New Classical views on macroeconomic policy.

Jo may be on firmer
ground when he argues that the neoliberal spirit of the 1980s might
have had something to do with the success of New Classical economics,
but I do not think it was at all central. As I have argued many
times, the New Classical revolution was successful because rational
expectations made sense to economists used to applying rationality in
their microeconomics, and once you accept rational expectations then
there were serious problems with the then dominant Keynesian
consensus. I suppose you could try to argue a link between the appeal
of microfoundations as a methodology and neoliberalism, but I think
it would be a bit of a stretch.

This brings me to my
final point. Jo notes that I have suggested an ideological influence
behind the development of Real Business Cycle (RBC) theory, but asks
why I stop there. He then writes

“It’s therefore odd that when Simon discusses the relationship
between ideology and economics he chooses to draw a dividing line
between those who use a sticky-price New Keynesian DSGE model and
those who use a flexible-price New Classical version. The beliefs of
the latter group are, Simon suggests, ideological, while those of the
former group are based on ideology-free science. This strikes me as
arbitrary. Simon’s justification is that, despite the evidence, the
RBC model denies the possibility of involuntary unemployment. But the
sticky-price version – which denies any role for inequality,
finance, money, banking, liquidity, default, long-run unemployment,
the use of fiscal policy away from the ZLB, supply-side hysteresis
effects and plenty else besides – is acceptable.”

This misses a crucial distinction. The whole rationale of RBC theory
was to show that business cycles were just an optimal response to
technology shocks in a market clearing world. This would always
deny an essential feature of business cycles, which is involuntary
unemployment (IU). It is absurd to argue that NK theory denies all
the things on Jo’s list. Abstraction is different from denial. The
Solow model does not deny the existence of business cycles, but just
assumes (rightly or wrongly) that they are not essential in looking
at aspects of long term economic growth. Jo is right that the very
basic NK model does not include IU, but there is nothing in the NK
model that denies its possibility. Indeed it is fairly easy to
elaborate the model to include it.

Why does the very
basic NK model not include IU? The best thing to read on this is
Woodford’s bible, but the basic idea is to focus on a model that
allows variations in aggregate demand to be the driving force behind
business cycles. I happen to think that is right: that is what drives
these cycles, and IU is a consequence. Or to put it another way, you
could still get business cycles even if the labour market always
cleared.

To suggest, as Jo
seems to, that the development of NK models had something to do with
the Third Way politics of Blair and Bill Clinton is really far
fetched. It was the inevitable response to RBC theory and its refusal
to incorporate rigid prices, for which there is again strong
evidence, and its inability to allow for IU.

That’s all. I do
not want to talk about globalisation and trade theory partly because
it is not my field, but also because I suspect there is some
culpability there. I would also never want to suggest, as Jo implies
I would, that ideological influence is confined to the New Classical
part of macroeconomics. But just as it is absurd to deny any such
influence, it is also wrong to imagine that the discipline and
ideology are inextricably entwined. 2010 austerity is a proof of
that.

Monday, 14 November 2016

For non-UK
readers who might be mystified by the picture above, some background.
The Daily Mail, a UK newspaper that once supported Hitler and seems
to be returning to those good old ways, recently called
the three independent judges, who had just ruled that parliament
should have a say on triggering Article 50 to leave to EU, “enemies
of the people”. In response to this and their remorseless headlines
pushing the idea of a migrant threat, a group called Stop Funding
Hate asked advertisers to take their business away from the Mail.
Lego appears
to be their first success.

All the UK tabloids
have Scottish editions, but there is one additional Scottish tabloid,
the Daily Record. In Scotland the Daily Record has a little under a
third of the daily tabloid market. The Scottish Sun has a little over
a third. The Mail has only 15%. Contrast this with the rest of the
UK, in which if I’ve done my sums right the Mail has a third of the
market, the Sun has a third, and the rest is split between the
Mirror, Star and Express. So in Scotland, unlike the rest of the UK,
the Mail does not dominate the tabloid market.

But everyone knows Scotland is just more left wing and liberal, you might say.
But you would be wrong. When social attitudes are measured, Scotland
consistently comes out as looking
very similar to the rest of the UK.

The idea that the
media is just a mirror, reflecting the political attitudes of its
readers, is a (dare I say cultivated) myth that falls apart the
moment you think about it. It relies on the idea that if a paper does
not reflect a reader’s political viewpoint, the reader will stop
buying. But most people do not buy newspapers for the politics.
Furthermore, the market is hardly flooded with alternatives. These
facts give newspapers considerable agency to push their owners views.
Of course there are limits to what a paper can do, and Murdoch in
particular is very careful not to let his papers get too out of line
with its readers, but within those limits they have considerable
power. Why else do politicians spend so much of their precious time
courting
them, if they have no influence? As Murdoch said, when asked why he
was so opposed to the EU: “That’s easy. When I go into Downing
Street they do what I say; when I go to Brussels they take no
notice.”

In the EU referendum
we know how the Mail, Sun and Express became part of the Leave
campaign. That means that only around 20% of the UK tabloid market
argued to Remain. What is more, this 80% pushed their position in a
way that can only be described as propaganda. Was this dominance just
a reflection of readers views?!

In Scotland however
the Daily Record argued for Remain, and the Scottish Sun sat on the
fence. (Compare the Scottish Sun’s editorial
to the one the rest of the UK saw.)
That means that those arguing for Leave were in a slight minority in
Scotland. But perhaps more importantly, readers obtained information
from newspapers, not propaganda. As we know, Scotland voted by over
60% to stay in the EU.

I listened to this
talk
(text)
by Nicola Sturgeon at SPERI a week ago. She argued, correctly in my
view, that leaving the EU but staying in the single market was the
obvious way forward after such a close vote. She says that not only
did austerity cause significant economic damage, but it also hurt the
very fabric of society. She talks about how a fairer society is also
good for the economy. None of the leaders of the three other main
parties could argue these points. And she argues all these things
with calm authority. It is natural to ask why the UK as a
whole does not have a political leader of this quality. Perhaps a
more balanced tabloid press in Scotland is part of the answer, although there are
no doubt many
other reasons.

Of course Sturgeon
and the SNP can attempt to deceive voters, as they did in the
Scottish referendum when it came to the short term fiscal costs. Yet
in Scotland newspapers, including the Sun, gave their readers both
sides of the argument rather than feeding them propaganda. And
Scotland voted to stay part of the UK. It was close, but so was the
EU referendum vote in the UK. Whether people get facts or propaganda
from their newspapers can make that difference.

Friday, 11 November 2016

I’ve tried to
write this as jargon free as I can, but it is mainly for economists

Nick Rowe claims
that the New Keynesian model assumes full employment. I think he is
onto something, but while he treats it as a problem with the model, I
think it is a problem with the real world.

Nick sets up a
simple consumption only economy with infinitely lived self employed
workers, where we are at the steady state (=long run) level of
consumption C(t)= output Y(t)=100. Then something bad happens (what
macroeconomists call a shock):

“every
agent has a bad case of animal spirits. There's a sunspot. Or someone
forgets to sacrifice a goat. So each agent expects every other agent
to consume at C(t)=50 from now on. ... So each agent expects his
income to be 50 per period from now on. So each agent realises that
he must cut his consumption to 50 per period from now on too,
otherwise he will have to borrow to finance his negative saving and
will go deeper and deeper into debt, till he hits his borrowing limit
and is forced to cut his consumption below 50 so he can pay at least
the interest on his debt.”

To
put it more formally: each agent believes the steady state level of
output has fallen. That in turn has to imply that everyone makes a
mistake about the desired labour supply of everyone else. I assume
this is a mistaken belief. If the belief was correct, then there is
no problem: the steady state level of output should fall, because
people want more leisure and less work.

Nick
says that there is nothing a monetary authority that controls the
real interest rate can do about this mistaken belief about the steady
state, because changing real rates only changes the profile of
consumption (shifting consumption from the future to the present) and
not its overall level. That is correct. Furthermore
if each individual simply assumes what they think is true, and does
not even bother to offer his pre-shock level of labour to others,
then this is indeed a new equilibrium which the monetary authority
can do nothing about.

But people and
economies are not like that. Each agent wants to work at the
pre-shock level, and will signal that in some way. They will see that
the economy had widespread underemployment, and as a result they
will revise their expectations about the steady state. I think
Nick knows that, because he writes that the NK model needs “to
just
assume
the economy always approaches full employment in the limit as time
goes to infinity, otherwise our Phiilips Curve tells us we will
eventually get hyperinflation or hyperdeflation, and we can't have
our model predicting that, can we.”

He treats that as if
it were a problem, but I do not see that it is. After all, we have no
problem with the idea that consumers will revise down their
expectations of their future income if they unexpectedly find they
are always in debt. Equally I have no problem with the idea that in
Nick’s economy with widespread and visible involuntary underemployment
consumers might think they had made a mistake about others desired
labour supply.

Let me put it
another way. In a single person economy we never get underemployment.
The problem arises because in a real economy we need to form
expectations about what others will do. But if there exist signals
which help us get our expectations right, that should shift us out of
a mistaken belief equilibrium.

Which gets us to why
I think Nick is on to something about the real world. Suppose there
is a shock like a financial crisis, which for the sake of argument
just temporarily reduces demand by a lot and creates unemployment.
Central banks cannot cut real interest rates enough to get rid of the
unemployment because of the zero lower bound. Inflation falls, but
because everyone initially thinks this is all temporary, and maybe
also because of an aversion to nominal wage cuts, we get a modest
fall in inflation.

Now suppose people
erroneously revise down their beliefs about steady state output, to be
more like current output. Suppose also that visible unemployment goes
away, because firms substitute labour for capital (UK) or workers get
discouraged (US). We get to what looks like Nick’s bad equilibrium.
Even inflation moves back to target, because the current output gap
appears to disappear. We no longer have any signals that there is an
alternative, better for everyone, inflation at target equilibrium
with higher output.

Now we could get out
of this bad equilibrium, if some positive shock or monetary/fiscal
policy raised demand ‘temporarily’ and people saw that, because
firms substituted capital for labour, or discouraged workers came
back into the labour force, inflation did not rise well above target.
But suppose policymakers also start to hold these erroneous beliefs,
and so do not try and get us out of the bad equilibrium. Could that
describe the secular stagnation we are in?

Wednesday, 9 November 2016

Introduction (added 10/11/16)I originally wrote this piece with a start and ending that assumed Trump had lost (yes, I know), and re-wrote it after he had won. I mention that because I think an unfortunate consequence of that is that many will read this as another 'why did he win' piece. It is not that, It is more a 'how did someone who was openly despised by most Republican politicians (included past Presidents), who broke all the normal rules, and generally acts like the dictator of some poor country unused to democracy, get a clear chance at being POTUS' type of question. Whether he won or not is irrelevant to that type of question.Asking why he won is a whole different type of question, because you are looking at marginal shifts in the way people vote. His appeal to those in the rest belt who were adversely effected by globalisation is clearly relevant in that case.So the US has had its Brexit moment. Perhaps the lesson is that if people are promised impossible things and no one tells them they are
impossible, you can motivate some potential voters to vote who would
not otherwise have done so. But it would be wrong to get hung up on
the polls: Nate Silver was clear that there was a good chance Trump
could win.

The question to ask is how could the United States elect to its most
powerful office not just a demagogue, but someone who lied openly all
the time, incited hatred against other religions and ethnic groups,
and promised to lock his opponent up if he won. We have to ask how
this could happen.

You will hear a lot of talk about those left behind by globalisation,
looking at charts like this

Share of income growth going to income groups from 1975 to 2007.
Source OECD

They are remarkable, and they may explain some of the detail of how
he swung votes at the margin. But, as Ezra Klein notes in an
interesting article
in Vox (written when he thought Trump would just lose), Trump support
comes from people who are well off, do not live in areas hit by
globalisation and are not in areas of recent immigration. They do not
explain how a demagogue and liar gets to win so many votes. And they
don’t explain how the chart above can lead to people electing a
President who now almost certainly will cut taxes for the 1%.

His explanation instead comes from political scientist Julia Azari,
who writes “The defining characteristic of our moment is that
parties are weak while partisanship is strong.” It is certainly
true that the Republican party hierarchy failed to stop Trump, and
that a great many of them then went on to endorse him. It is also
true that Sanders, an insurgent from the left, did very well in the
Democrat primaries. But there the equivalence ends. Sanders is no
demagogue who lies openly all the time, incited hatred against other
religions and ethnic groups (unless perhaps you count bankers as an
ethnic group), and promised to lock his opponent up if he won. He is
hardly a threat to the democratic process.

This is one problem that I have with this argument. It implies a
symmetry which is just not there. That is because it ignores a key
feature of politics in the US over the last few decades, which is a
steady march to the right. The threat to democracy comes only from
the Republicans and their base. Let me put it another way.
Republicans have become more partisan because the believe a centrist,
experienced and relatively honest Hillary Clinton is beyond the pale,
while Democrats have become more partisan because Republican policies
are often mad. (Think climate change, guns, teaching evolution)

The other problem is that the analysis does not spell out why the
Republican base has become so extreme, and why plenty of people who
are not so extreme will have voted for Trump. You can certainly say
that this extremism was encouraged by Republican politicians before
the rise of the Tea Party: think of holding the government to ransom
when Bill Clinton was President. But I think the biggest factor
missing from Klein’s account - as it often is by those in the media
- is the media itself.

This consists of two parts, much as it does in the UK. First there is
Fox news: a highly partisan news provider with a clear right wing
bias. Second there is an inability of the non-partisan media to
provide any kind of counterweight when someone like Trump arrives,
and in some cases provides help to his cause. I have talked about
this second factor before, here
and more briefly here,
so let me concentrate on the first today.

The story is in fact told
better than I ever could by Bruce Bartlett, who worked in the Reagan
White House and for George HW Bush, so I’ll just summarise it here.
The story starts under Reagan, who provided pressure to withdraw the
Fairness Doctrine, which was similar to what keeps UK broadcasters
from being partisan. Initially that allowed the rise of talk radio,
and then Fox News. Gradually being partisan at Fox meant misinforming
its viewers, such that Fox viewers are clearly
less well informed than viewers of other news providers. One analysis
suggested over half of the facts stated on Fox are untrue: UK readers
may well remember them reporting
that Birmingham was a no-go area for non-Muslims.

But why is this causal, rather than simply being a mirror on the
rightward drift of the Republican base? The first point is that there
is clear
evidence that watching Fox news is more likely to make you vote
Republican. The second is that, like the tabloids in the UK, this
propaganda machine can turn on party leaders and keep them from
moving left. The third is that it is also a machine for keeping the
base angry
and fired up and believing that nothing could be worse than voting
for a Democrat. It is Fox News that stops Republican voters seeing
that they are voting for a demagogue, conceals that he lies openly
all the time, incites hatred
against other religions and ethnic groups, and makes
its viewers believe that Clinton deserves to be locked up. Just as
UKIP (and perhaps now the Conservative party) is the political wing
of the tabloids, so Trump is a creature of Fox news.

Trump’s election is a disaster for humanity. That may be true in
ways we can only speculate about, but we know
that he does not believe in climate change, thinks it is a Chinese
hoax, will not follow the Paris agreement and will do all he can to
support coal. With a Republican congress no one will stop him. When
you think about that, remember also that Fox news (like sections of
the UK press) encourages climate change denial, and the issue was not
mentioned by the non-partisan nightly news election coverage (which
obsessed about emails) or raised in any of the presidential debates.
If you continue to mislead people in this way, they will continue to
make terrible mistakes when they vote.